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2. Anderson company plans to acquire equipment, with a 5-year life, at a cost of R10 million. Anderson can borrow the R 10 million at
2. Anderson company plans to acquire equipment, with a 5-year life, at a cost of R10 million. Anderson can borrow the R 10 million at 10%, interest only until the repayment in 5 years. Alternatively, Anderson can lease the equipment for five years at a rental charge of R2.75 million per year, payable at the beginning of each year. The equipment, when used will have an estimated net salvage value of Rl million. If Anderson buys, it will sell at the end of five years. If Anderson leases, it will not exercise the option to buy the equipment. The lease includes maintenance service, whereas if bought, the equipment would require maintenance provided by a service contract for R500,000 per year, at the beginning of the year. The equipment falls into the MACRS five-year class life, and the depreciable basis is the original cost. Anderson's tax rate is 40%. Should Anderson company buy or lease the equipment? APPENDIX \begin{tabular}{|c|c|c|c|c|} \hline Rou & \begin{tabular}{l} preciatio \\ Percent \end{tabular} & \begin{tabular}{l} rcentage \\ by recove \end{tabular} & \begin{tabular}{l} Recover \\ year \end{tabular} & \\ \hline Recovery year & 3 years & 5 years & 7 years & 10 years \\ \hline 1 & 33.33% & 20.00% & 14% & 10% \\ \hline 2 & 44.45% & 32.00% & 25% & 18% \\ \hline 3 & 14.81% & 19.20% & 18% & 14% \\ \hline 4 & 7.41% & 11.52% & 12% & 12% \\ \hline 5 & & 11.52% & 9% & 9% \\ \hline 6 & & 5.76% & 9% & 8% \\ \hline 7 & & & 9% & 7% \\ \hline 8 & & & 4% & 6% \\ \hline 9 & & & & 6% \\ \hline 10 & & & & 6% \\ \hline 11 & & & & 4% \\ \hline Totals & 100% & 100% & 100% & 100% \\ \hline \end{tabular}
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